A Closer Look

In my previous posting titled “Why I Use Indicators”, I cited a Wall Street Journal article, which in turn cited data from the Philosophical Economics blog and Ned Davis Research which showed that the percentage of household wealth invested in the stock market is currently high at over 56%.  This is bearish for future stock performance.  

Taking A Closer Look

After I wrote that piece, I read a piece by noted economist Dr. Edward Yardeni that supposed that one reason why interest rates remain as low as they are (albeit moving upward) is that investors still own a lot of bonds because they are afraid that “this is going to end badly”, likely because it has in fact ended badly many times in the past.

Thus, the Philosophical Economics data suggest investors don’t own enough bonds, but the Yardeni blog suggests that investors still are awash in bonds.  These two pieces didn’t foot with one another.

The End Is Not Near

So, I went back and looked at the Ned Davis Research (NDR) data that underpins that WSJ article.  NDR’s data shows that the ratio of stocks to bonds as a percentage of household wealth has gone from about 1:1 in 2009 to over 3:1 currently.  During this time period, the S&P 500 Index has risen from about 756 to its current level of about 2,840, which is an increase of about 276%.  That tells me that most of the increase in the percentage of household wealth invested in stocks has been due merely to the increase in the valuations of stocks, and not because investors have been pulling money out of stocks and into bonds.  To me, this is not as alarming as if investors were switching from bonds into stocks.  Investors are merely riding the wave, not stoking the wave.  Maybe the end isn’t near after all.

The World Has Changed

Another insight is that the world has changed a lot and stock ownership has become much more widespread as technology has advanced and the cost to trade stock has plummeted over the years.  Consequently, I don’t know how relevant data from the 1950’s and through the 1970’s are in this analysis.  NDR weighs its pre-1980 data as much as more current data and I think that is not the correct way to look at the investing world.

IMO

I reiterate from my previous post that the better way to look at indicators is to glean what investors, in general, are saying about the future of corporate earnings and the resultant stock performance.  I believe we are still in a bull market and that we should continue to own stocks, depending on your personal situation.  By the way, the Philosophical Economics blog is excellent but it is dense reading.  They post very long blogs but only a few times per year.  If you are up at night, you should try reading one of their pieces if you want to fall back to sleep.  Its author purposefully remains anonymous, but they are very good.  Yardeni uses a different method, more like mine – he posts shorter blogs several times per month.  Read them both for good education.

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